Why Erdogan Won’t Ask the IMF for Help
Turkey’s economy is a mess, but its president won’t seek an IMF loan because the conditions would mean giving up his extensive patronage network.
BY AYKAN ERDEMIR, JOHN A. LECHNER | JUNE 1, 2020, 2:43 PM
Turkish President Recep Tayyip Erdogan (center) with his wife, Emine Erdogan, followed by then-International Monetary Fund Director Christine Lagarde (left) in Paris on Nov. 11, 2018, prior to commemorations marking the 100th anniversary of the armistice ending World War I. JACQUES DEMARTHON/AFP VIA GETTY IMAGES
Turkey’s economy is a dam waiting to break. The lira has lost 90 percent of its value against the dollar over the last three years, while Ankara, as of last month, depleted its net international reserves (excluding swap lines) in an ineffective defense of the currency. Turkey’s overleveraged nonfinancial companies, already drowning in foreign exchange liabilities totaling some $300 billion, continue to pay the price. Yet Turkish President Recep Tayyip Erdogan is still unlikely to sign a bailout deal with the International Monetary Fund (IMF), despite the country’s need for it.
That’s because Erdogan prefers quick fixes. One example of this is his recent expansion of the lira-riyal swap line with Qatar—a temporary arrangement that boosts Turkey’s Central Bank reserves on paper—from $5 billion to $15 billion rather than negotiating what Turkey’s ailing economy desperately needs: a Stand-By Arrangement or an Extended Fund Facility with the IMF, which would provide the country with a medium-term low-interest loan in exchange for committing to structural reforms.
The obstacle for Turkey’s strongman president isn’t ideology; it’s IMF conditionality and its potential to undermine his hypercentralized style of governance.
Many pundits in Turkey and abroad argue the main impediment to an IMF program is Erdogan’s ideology coupled with his fear of voter backlash to such a program. They’re wrong. Rather, the obstacle for Turkey’s strongman president is IMF conditionality and its potential to undermine his hypercentralized style of governance.
Within the last decade, Erdogan consolidated power with a political platform built on unorthodox economic policies. Investors used to view the president’s bizarre beliefs—interest rates leading to higher inflation or an “interest-rate lobby” led by Jews aiming to tank Turkey’s economy—as embarrassing and annoying. Those days are long gone. After the Central Bank lost its last semblance of independence in 2019, those beliefs have become mainstream. To a large extent, they now dictate Turkey’s monetary policy, which has led to an exodus from the country’s bond and equity markets.
To make matters worse, the pointless defense of the Turkish currency’s exchange rate, first at 6 and then 7 liras to the dollar, have proved catastrophic to Central Bank reserves. Erdogan is particularly vulnerable here because those efforts were mounted by his underqualified son-in-law, Finance and Treasury Minister Berat Albayrak, who should never have held the position in the first place.
It is true that Erdogan has proved himself to be pragmatic before, particularly in the face of crisis. Interest rate hikes have occurred, even when he initially opposed them. After the escalation of the crisis with Russia, he swallowed his pride and reset ties. But these decisions did not entail a devolution of power. In fact, given his near-total control over the media, Erdogan can make U-turns far more easily than in a true democracy, as long as they do not require him to reverse his 18 years of power consolidation.
The real reason Erdogan cannot go to the IMF is that any Stand-By Arrangement or Extended Fund Facility requires structural reform and, therefore, power-sharing and good governance measures. The rule of Erdogan’s Justice and Development Party (AKP) has benefited from a lack of transparency and accountability.
Turkey’s sovereign wealth fund, which acts as the Turkish president’s parallel budget, is not audited by parliament or the Court of Final Accounts. One private auditor even said there is not enough data to conduct a proper assessment. Economic data provided by the Turkish Statistical Institute is also suspect. A 2017 report by Germany’s second-largest lender, Commerzbank, on Turkey’s dubious growth figures was titled, “Turkey – Are you kidding me?”
Turkey’s economy is a mess, but its president won’t seek an IMF loan because the conditions would mean giving up his extensive patronage network.
BY AYKAN ERDEMIR, JOHN A. LECHNER | JUNE 1, 2020, 2:43 PM
Turkish President Recep Tayyip Erdogan (center) with his wife, Emine Erdogan, followed by then-International Monetary Fund Director Christine Lagarde (left) in Paris on Nov. 11, 2018, prior to commemorations marking the 100th anniversary of the armistice ending World War I. JACQUES DEMARTHON/AFP VIA GETTY IMAGES
Turkey’s economy is a dam waiting to break. The lira has lost 90 percent of its value against the dollar over the last three years, while Ankara, as of last month, depleted its net international reserves (excluding swap lines) in an ineffective defense of the currency. Turkey’s overleveraged nonfinancial companies, already drowning in foreign exchange liabilities totaling some $300 billion, continue to pay the price. Yet Turkish President Recep Tayyip Erdogan is still unlikely to sign a bailout deal with the International Monetary Fund (IMF), despite the country’s need for it.
That’s because Erdogan prefers quick fixes. One example of this is his recent expansion of the lira-riyal swap line with Qatar—a temporary arrangement that boosts Turkey’s Central Bank reserves on paper—from $5 billion to $15 billion rather than negotiating what Turkey’s ailing economy desperately needs: a Stand-By Arrangement or an Extended Fund Facility with the IMF, which would provide the country with a medium-term low-interest loan in exchange for committing to structural reforms.
The obstacle for Turkey’s strongman president isn’t ideology; it’s IMF conditionality and its potential to undermine his hypercentralized style of governance.
Many pundits in Turkey and abroad argue the main impediment to an IMF program is Erdogan’s ideology coupled with his fear of voter backlash to such a program. They’re wrong. Rather, the obstacle for Turkey’s strongman president is IMF conditionality and its potential to undermine his hypercentralized style of governance.
Within the last decade, Erdogan consolidated power with a political platform built on unorthodox economic policies. Investors used to view the president’s bizarre beliefs—interest rates leading to higher inflation or an “interest-rate lobby” led by Jews aiming to tank Turkey’s economy—as embarrassing and annoying. Those days are long gone. After the Central Bank lost its last semblance of independence in 2019, those beliefs have become mainstream. To a large extent, they now dictate Turkey’s monetary policy, which has led to an exodus from the country’s bond and equity markets.
To make matters worse, the pointless defense of the Turkish currency’s exchange rate, first at 6 and then 7 liras to the dollar, have proved catastrophic to Central Bank reserves. Erdogan is particularly vulnerable here because those efforts were mounted by his underqualified son-in-law, Finance and Treasury Minister Berat Albayrak, who should never have held the position in the first place.
It is true that Erdogan has proved himself to be pragmatic before, particularly in the face of crisis. Interest rate hikes have occurred, even when he initially opposed them. After the escalation of the crisis with Russia, he swallowed his pride and reset ties. But these decisions did not entail a devolution of power. In fact, given his near-total control over the media, Erdogan can make U-turns far more easily than in a true democracy, as long as they do not require him to reverse his 18 years of power consolidation.
The real reason Erdogan cannot go to the IMF is that any Stand-By Arrangement or Extended Fund Facility requires structural reform and, therefore, power-sharing and good governance measures. The rule of Erdogan’s Justice and Development Party (AKP) has benefited from a lack of transparency and accountability.
Turkey’s sovereign wealth fund, which acts as the Turkish president’s parallel budget, is not audited by parliament or the Court of Final Accounts. One private auditor even said there is not enough data to conduct a proper assessment. Economic data provided by the Turkish Statistical Institute is also suspect. A 2017 report by Germany’s second-largest lender, Commerzbank, on Turkey’s dubious growth figures was titled, “Turkey – Are you kidding me?”